UK state aid regulation in the event of a “no-deal” Brexit

On 23 August 2018 the UK Government published guidance on how state aid would be dealt with after 29 March 2019 in the event that the UK leaves the EU with no negotiated agreement (generally known as a “no-deal Brexit”). As explained in our previous blog post, the Government’s current preferred deal (set out in the Chequers proposal) provides for business as usual during the transitional period (until the end of 2020). After that, the UK’s Competition and Markets Authority (CMA) would take over enforcing state aid rules in the UK, based on a common rulebook with the EU. In effect, the CMA would be regulating whether UK state resources have been (mis)used in a manner which distorts competition – and enforcing repayment of such illegal aid where it is identified.

The latest guidance confirms that in the event of no deal, the EU state aid rules would be transposed into UK domestic legislation. The transposition would apply across all sectors and include existing block exemptions. State aid approval decisions already granted by the European Commission would also be carried over into UK law.

In practice, this means that while the substance of the state aid rules would remain largely the same in at least the short term, from 29 March 2019 competence to assess UK state aid would pass immediately from the European Commission to the CMA. The CMA does not currently deal with any EU state aid issues, but is gearing up for the possibility of taking over from the Commission next year, with a new state aid team already in place (although it was announced this week that the designated leader of that team, Sheldon Mills, will instead become Director of Competition at the FCA).

There are many questions still to be answered about how a no deal Brexit would pan out, but three jump out from the Government’s announcement.

The first practical question is what companies and public authorities should do in terms of seeking state aid approval between now and March 2019 where the potential aid is granted from UK state resources. The Government guidance says that, in the event of no deal, any cases not approved by the Commission would need to be submitted to the CMA. So a project could get almost all the way to a Commission clearance decision and then need to be re-submitted to the CMA to start again in a new UK process. Businesses expecting to receive state aid from the UK over the next year should be alive to the potential delays this could cause and consider how they might mitigate this risk.

The second issue is that the guidance says that the existing EU state aid framework would be replicated in the UK with only “technical modifications” to make it work in a domestic UK context. But this underestimates the challenges in copying across the current EU rules into a UK context. Would existing EU thresholds for regional aid be appropriate in a domestic context, for example, or indeed current EU de minimis rules? How should the new UK rules deal with Article 107(3)(b) of the Treaty – aid to promote the execution of an important project of common European interest – which has been used as the basis for approvals for everything from HDTV to the Channel Tunnel? These will be interesting questions for the CMA to resolve – and will require policy choices as well as mere technical adjustments. Such decisions will of course be more complex in a context where the CMA is only looking at UK aid and UK policy interests.

Finally, there is the issue of how UK state aid would develop after Brexit in the event of a “no deal” scenario. Without the common rulebook and accompanying oversight committees that are foreseen in the Chequers proposal, there appears to be more scope for the UK state aid rules to diverge from the EU rules over time. This could lead to more uncertainty for UK businesses, but also greater flexibility in adjusting the state aid rules to suit the UK economy.

As in many other areas, a negotiated Brexit would be more appealing for parties which may receive UK state aid in the months leading up to and following Brexit, as this will offer more certainty of approach and a smoother transition. However, while questions remain, the principles of how state aid will be dealt with the event of a no deal Brexit are becoming clearer.

Brexit: planning for the future as negotiations continue

We have created this Brexit blog to provide up to date analysis and legal commentary as the new Brexit landscape evolves, addressing key questions and topics of interest to our clients across the different industry sectors in which they operate.